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A Primer On The Hepatitis C Market

Even if you're not a biotech or pharma investor, you've probably caught an earful of news lately about the virus called hepatitis C.

From last December's record-breaking launch of Gilead Sciences' (GILD) wonder drug Sovaldi to the controversies about its $84,000 price tag to Merck 's (MRK) recent $3.85 billion buyout of formerly neglected biotech Idenix Pharmaceuticals (IDIX), hepatitis C has provided a constant supply of headlines this year. But all this page-by-page horse-race news may have clouded the big picture, so here is a quick overview for investors.

The Market

No one is sure exactly how many people might be infected with the hepatitis C virus (HCV). Transmitted by blood-to-blood contact — usually from unclean needles or unscreened donated blood — the virus can sit in the body for years without provoking apparent symptoms. As a result, many people don't realize that they have it. But the virus can also cause a multitude of troubling symptoms and, if left untreated, can eventually cause scarring (cirrhosis) and sometimes cancer of the liver.

Despite the uncertainties, it is generally agreed that a huge number of people are infected. The World Health Organization estimates that about 3% of the planet's population — about 170 million people — has HCV. In the U.S., estimates range between 3 million and 4 million, with only about half that number diagnosed.

Because unclean needles are associated with drug addiction, substandard medical care and amateur tattoos, the poor and imprisoned make up a disproportionate amount of the infected. In a report prepared in December for Johnson & Johnson (JNJ), the consulting firm Milliman estimated that about half of Americans with undiagnosed HCV are uninsured. That's not even counting the prison population, whose rate of infection is estimated by different sources at anywhere from 23% to 39%.

A significant number of this population is also infected with HIV. In the broader population, about a quarter of all HIV patients also have HCV, according to the Centers for Disease Control (CDC).

In the U.S., one's generation also makes a difference. People born in the 1950s, especially males, are far more likely to be infected with HCV than those born earlier or later. A couple of years ago, the CDC observed a looming HCV public health crisis, as the untreated baby boomers are about due to develop cirrhosis of the liver, which occurs in about 15% to 20% of all cases. This concern led the agency to recommend that everybody of that generation — no matter how clean they think they are — should get tested.

Another important factor affecting the HCV population: There are six different genotypes of the virus. In the U.S., about 73% of patients have genotype 1, 14% have genotype 2, and 8% have genotype 3. Other countries have different ratios; in Japan, genotype 2 is the most common.

The Drugs

Until 2011, the standard treatment for HCV was regular injections of interferon combined with a generic oral medicine called ribavirin. Interferon, a protein, is toxic and causes flu-like symptoms, which are especially misery-inducing when treatment lasts for six months to a year. Even then, at least 20% of people who were treated were not cured. As a result, people tended to put off treatment until they were desperate: only about 220,000 Americans have received this therapy.

With the rise of biotechnology, drugmakers started experimenting with new platforms. One popular class of target drugs is protease inhibitors. In the 1990s, they helped people with HIV to manage the disease rather than simply die.

The first two HCV protease inhibitors hit the U.S. market in May 2011: Merck's Victrelis and Vertex Pharmaceuticals ' (VRTX) Incivek. The next one, J&J's Olysio, was approved in November. Under current labeling, all of these drugs still have to be taken with interferon, however.

Another class of drugs that have shown early promise are polymerase inhibitors. The most effective among them were nucleotide or nucleoside drugs, known in the industry as "nucs." Clinical trials conducted by several different companies showed their efficacy.

Their main drawback: safety. Probably the most spectacular nuc blowup came in August 2012, when Bristol-Myers Squibb (BMY) stopped a phase-two trial of its nuc after a patient died of heart failure. The only first-generation nuc that survived unscathed was Gilead's sofosbuvir, which was later branded Sovaldi.

Sovaldi appears to represent a giant step forward in HCV treatment. The drug is taken orally, cures upward of 95% of patients in just 12 weeks and has few side effects. Even so, it isn't made to be a solo act. The FDA approved the drug but recommended that genotype 1 patients take it with interferon unless they're too sick to handle interferon. Many patients have been combining Sovaldi with Olysio instead. Gilead's larger goal is to combine the drug with an NS5a inhibitor, which can provide interferon-like treatment without the downside effects.

NS5a inhibitors have turned out to be the third major class of oral drugs that succeed against HCV. In a clinical trial reported last year, Bristol-Myers' NS5a inhibitor, daclatasvir, scored a 100% cure rate when combined with sofosbuvir for previously untreated genotype 1 patients.

But Gilead decided not to pursue that combo because it had its own NS5a, ledipasvir. The sofosbuvir-ledipasvir combo has scored outstandingly in trials and is conveniently co-formulated into one pill to be taken once daily. Gilead has filed for approval with both the FDA and the European Medicines Agency (EMA) for genotype 1 patients. It is expected to launch in October.

The Drama

Gilead's combo is expected to have company. By December, AbbVie (ABBV) is expecting approval of its "3D" regimen. It combines all three types of drugs: a protease inhibitor (licensed from Enanta Pharmaceuticals (ENTA), an NS5a inhibitor, and a non-nucleoside polymerase inhibitor. It's all-oral, has a good safety profile and cures 96% of genotype 1 patients in 12 weeks. Analysts say that the regimen's only disadvantage is its inconvenience, since it involves multiple pills per day instead of just one.

But what investors will most look at is the price. It has huge implications for Gilead, which launched Sovaldi with a price tag of $1,000 a pill — or $84,000 for 12 weeks of treatment. As noted above, the HCV-infected population is far from rich, so most of the objections to it have come from payers — that is, insurers — and their associates. Pharmacy benefit manager (or PBM) Express Scripts (ESRX) estimated in its annual Drug Trend report, issued in April, that spending on HCV treatment will double this year, then jump 200% in both 2015 and 2016. Consensus estimates have annual sales of Sovaldi alone passing $11 billion next year.

"Never before has a drug been priced this high to treat a patient population this large, and the resulting costs will be unsustainable for our country," Express Scripts Chief Medical Officer Steve Miller said in a statement at the time.

Express Scripts has made clear that it intends to play drugmakers against each other, but as ISI Group analyst Mark Schoenebaum pointed out, "this plan by the PBMs requires that the drug companies 'play ball.'" AbbVie has been tight-lipped about its pricing plan, leading to much speculation. Schoenebaum, for one, believes that it won't price much lower than Gilead but may offer discounts to hard-to-treat patients, such as those with advanced liver disease or HIV co-infection.

Bristol-Myers Squibb is also targeting the tough-to-treat populations, senior vice president Douglas Manion told IBD in March. Bristol has filed for approval of daclatasvir as a co-treatment with other drugs, including Sovaldi. It's also following AbbVie's roadmap by combining daclatasvir with a protease inhibitor and a non-nucleoside polymerase inhibitor from its own labs.

Are HCV's Days Numbered?

Which brings us back to Merck's acquisition of Idenix last month. In April, Merck reported a 98% cure rate after 12 weeks with its own combo of a protease inhibitor and an NS5a inhibitor. Idenix, however, brings a rare pair of nucs that haven't (yet) run into safety trouble. Merck's goal, as stated in its presentation that day, was to develop a single daily pill that works across all genotypes in just four to six weeks, which is significantly faster than what this year's drugs are doing.

Idenix's drugs are still early in development, signaling that Merck believes the market will remain competitive for some time. In its presentation, the company said that the total HCV market should pass $20 billion in 2018, "driven by second-generation, all-oral, triple-therapy combinations." This claim seemed to counter some fears on the Street that, because the new HCV drugs appear able to cure nearly all patients, demand would ultimately prove short-lived.

"Consensus thinks HCV sales go bad in 2016 (HCV market demise), but we have said we believe long-term market is more sustainable," wrote RBC Capital Markets analyst Michael Yee in a June 9 note. But markets outside the U.S. present significant opportunity, Yee said, and Merck's deal suggests rational pricing for the drugs.